Wall Street reform bill expands disclosure rules __»

May 21, 2010

Earlier this week, we looked at an unusual disclosure provision that was added to the Senate financial-regulation reform bill. But now that the Senate has passed the nearly 1,600-page legislation, with a 59-39 vote last night, it’s worth looking at some of its other, farther-reaching measures with the potential to reshape disclosure and corporate filings in coming months and years.

The House passed its own Wall Street reform bill in December, of course, and now the two chambers must reconcile the language — inevitably a horse-trade in which some measures are stripped out, others modified and, on occasion, wholly new provisions inserted. But it’s safe to say that many of the Senate’s provisions, and quite possibly most of them, will make it into law in some form, in one form or another. (Of course, the House could also simply pass the Senate bill, sending it to President Obama’s desk.)

So without further ado, culled from the bill itself as well as supporting material posted on the Senate Banking Committee website, here are some provisions likely to make waves for companies, investors, securities lawyers and the rest of us who rummage around in corporate filings:

Say on pay: Perhaps most prominently, the bill would give investors an up-or-down vote on a broader range of executive pay than they currently have, albeit a non-binding vote. Companies have resisted similar, company-specific proposals made during the existing proxy process, but we hear that some directors are cheering it on — quietly, to avoid alienating management. After all, if investors have given the thumbs-up to a pay package, it gets harder to accuse the board of feathering management’s nest.

Proxy access: Another provision could make proxy battles more routine than dramatic novelty. It would give the SEC authority to let investors nominate directors using the proxy that companies distribute, instead of forcing them to launch an expensive proxy campaign with separate mailings if they want their own candidates elected. Investor advocates call it a powerful tool to make boards more accountable to shareholders (and therefore companies as well). Managers fret about environmental or union activists winning board seats and causing a ruckus. Much may depend on how the SEC implements any new requirement, but given that a similar provision is in the House bill, expect something along these lines to wind up in the final law.

Majority voting: The bill would also require directors in uncontested elections to receive a majority of votes cast to retain their seats. At least one recent version of the bill would require defeated directors to tender their resignation — and the board to accept it, unless it votes unanimously to keep the director on and makes its explanation public. Last year, the Council of Institutional Investors says, 45 companies kept 95 directors on their boards even after they failed to win a majority of votes.

Pay & governance grab-bag: Other provisions would require compensation committees to be made up of independent directors, with the authority to hire a consultant separate from management’s. Companies restating their financials would be required to claw back incentive pay from executives that was higher than it should have been because of the errors, a provision similar to one some large companies have already begun adopting. The SEC would also have to review its compensation-disclosure requirements — among other things, requiring a 5-year comparison of executive pay to stock performance, which “may include a graphic representation of the information required to be disclosed.” A new Investment Advisory Committee would give investors a formal voice within the SEC, offering advice on regulatory practices and priorities.

Corner-office qui tam: Health-care companies and defense contractors have had to worry about whistleblower lawsuits for years, thanks to laws that give plaintiffs in successful “qui tam” lawsuits a cut of the recoveries in cases over defrauding the government. Now more companies could face similar risks under a provision that would allow those reporting securities violations to collect as much as 30% of any funds recovered, according to a bill summary posted on the Senate Banking Committee site.

Good for the gander: The banking committee’s bill summary suggests CFOs everywhere may get to experience a little schadenfreude as they prepare the 10-K each year: One provision would require the SEC to suffer through its own annual review of internal supervisory controls, and orders up a study of “SEC management” from the Government Accountability Office.

Image source: scott*eric via Flickr

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